The politics of QE2

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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