The politics of QE2

By Felix Salmon
November 16, 2010
Allan Sloan has a good point today: by implementing QE2, Ben Bernanke has become a politician.

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Allan Sloan has a good point today: by implementing QE2, Ben Bernanke has become a politician. It’s an important development: for reasons I don’t fully understand, the debate over QE2 has divided along party-political lines, with the Republicans lining up against it and the Democrats attacking them. Globally, too, as we saw in Seoul, the QE2 debate is conducted at summit level, and this time the dividing lines are even starker: it’s essentially the U.S. vs the world.

Interestingly, this is one of those old-fashioned technocrat vs technocrat policy debates, in contrast to the technocrat vs populist debates which seem to have taken over far too much airtime of late. But it’s just as shrill. And as Sloan says, it does the venerable Fed no favors to find itself on one side of a debate generating so much heat and so little light: Bernanke “was already making a high-stakes economic bet with QE2,” he says, “and now it’s a political bet, as well”. If QE2 doesn’t work — Sloan raises the specter that it “could imperil the dollar and our financial system” — then it’s not just the economy which will be harmed, but also the Fed’s long-term credibility and pre-eminence. In fact, the politics of QE2 are already hobbling the Fed’s freedom of movement, as Neil Irwin explains:

The political maelstrom that erupted after the Federal Reserve’s decision two weeks ago to take expansive action to boost the economy has reduced the central bank’s maneuvering room as it considers how to get growth on track…

“It now looks like it’s going to be hard for the Fed to do another round of aggressive policy because they know the criticism is going to undercut some of the confidence-building impacts,” said Ethan Harris, chief economist of Bank of America-Merrill Lynch.

Bernanke, then, has every reason to want to reduce the volume on this debate: the mere existence of the debate itself can easily counteract any good which comes from QE2.

One way of doing that would be to admit that QE2 is an untried experiment: while QE1 worked as a weapon in the crisis-fighting arsenal, QE2 is being asked to do something quite different. So the Fed should define much more clearly than it has done until now what exactly QE2 is designed to achieve, and what criteria might be used to determine whether it is succeeding or failing. And if it’s showing signs of failing, then the Fed should also be explicit about how and when it might be unwound.

War-gaming QE2 in this way would make the Fed seem less sure in its actions, but it might also help mute some of the harsher criticism coming its way—and thereby actually improve the chances that QE2 succeeds. Bernanke is no Maestro: no one trusts him implicitly in the way they trusted Greenspan, pre-crash. So maybe what the economy needs is for him to become a little less Olympian and a little more human.


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Um, did you really think that Bernanke wasn’t a politician before this? I suppose you also think judges aren’t politicians and journalists are capable of objective reporting.

Posted by Wismar | Report as abusive

Your suggestion only works if you assume that people are lining up in the Pro and Con columns because of good-faith policy disagreements. That’s manifestly not the case, at least not in Washington; only a handful of the relevant figures really understand how QE2 is supposed to function.

Domestically, it’s not anything specific to QE2 that’s led to controversy, it’s just Bernanke’s decision to do something — anything! — about the economy. As long as Obama is president and the employment situation sucks, Republicans have a perverse incentive to lambast any and all attempts to intervene: the public is disgruntled enough that a substantial portion of any critique will take hold. And once the Republicans have all lined up on one side of the fence, the Democrats feel compelled to line up opposite them.

It’s exactly the same dynamic that allows Republicans to reap electoral rewards from attacking the stimulus: the validity of the attack is utterly decoupled from its effectiveness. And it’s why any action Bernanke takes will become politicized: Washington isn’t interested in policy debates so much as it’s interested in finding cudgels with which to hit the other side.

Posted by WHS | Report as abusive

I suppose on some level it has become “political”, in the same way that disparate impact is symmetric: backing off of QE2 at this point would very clearly be viewed as a political move, in a way that continuing it does not. I certainly don’t think the institution of QE2 was done for reasons that would meet any non-fatuous definition of “political”.

Posted by dWj | Report as abusive

The structure of the Fed is designed, specifically, and in the “brochure” selling it, to insulate it from political pressure. The Fed answers to no one. Bernanke cannot be countermanded. This policy cannot be stopped by legislative action–absent a Congressional restructuring of the Fed itself–Presidential order, or court decision.

The political pressure, to the extent it might exist, is precisely a questioning–long overdue–of a system in which very large, very rich banks, run by very wealthy men and women, have complete control over the creation and distribution of our national currency. They can literally write themselves checks. That’s what “Quantitative Easing” is: the Fed is writing checks to member banks, to take Treasure Bonds off their hands at a negotiated–not free market–price. They will then be free to spend that money on whatever their little hearts desire.

The whole system is corrupt, root and branch. The Fed has caused our currency to inflate over 2,000% since 1913. Given that inflation is intrincally wealth transfer, this means it has been a system in which the force of law has been used to enable the rich to get richer at the expense of the rest of us.

I deal with all this–including Keynesian economics–at length, here: tml

Posted by barrycooper | Report as abusive

It’s not clear what Allan Sloan means by “politician” except that he seems to be using it to mean someone who implements a policy Allan Sloan doesn’t like. Bernanke would be just as much a politician if he was pushing a policy of doing nothing, though Allan Sloan would not call Bernanke a “politician” because that would be the policy that Allan Sloan would prefer.

Look, Bernanke is an incredibly respected economist who has devoted a large part of his life to studying how the Federal Reserve responded to the 1929 economic crisis, which lasted throughout most of the 1930s. That’s the reason Bush nominated him to head the Federal Reserve in the first place; he has unique insights into Fed policy.

Bernanke has a thorough understanding of what the Fed did during the 1930s, in response to the 1929 crisis, and he has convincingly argued that a different set of decisions by the Fed would have made the Great Depression shorter. Bernanke developed of widely accepted mathematical models of what the Fed did in those days, and these models actually predicted the 2008 economic crisis. (That’s why we had the early 2008 Bush tax-rebate stimulus.)

Bernanke is an extremely respected economist with a background uniquely suited to leading the Federal Reserve’s response to the 2008 economic crisis. Bernanke’s theoretical models actually predicted the 2008 financial crisis in time, at least, for the government not to be completely surprised by it. No less a person than Warren Buffett credits Bernanke with successfully heading off a worse economic crisis than we are experiencing today.

Given all of that, with Bernanke’s understanding of the subject matter and his reality-tested views on how the Fed can affect the economy, Bernanke would probably view the do-nothing policy advocated by Allan Sloan as a policy of watching the economy go hopelessly down to tube into deflation and possibly depression. For Bernanke to do that, merely to avoid ruffling the feathers of the likes of Allan Sloan, would be a completely amoral choice.

And who is Allan Sloan, anyway? As far as I can tell, he’s a magazine editor. Let him limit his opinions to matters of layout and story selection, where his expertise lies. In the area of economic policy, he’s no more than an entertainer — telling his readers what they want to hear so that they renew their subscriptions. Who cares?

Posted by Bob9999 | Report as abusive

It’s obvious why QE2 is necessary. Congress is gridlocked (already was before Nov 2). So, if Bernanke is a “Politician” because he wanted to try to address unemployment, slow growth, and a threat of deflation with the only weapon he has at his disposal, then I guess that makes him a “Politician” (as if that’s become a dirty word now). I, for one, am glad he is. I wish his detractors had some positive alternatives to offer.

Posted by okiebill | Report as abusive