Opposing QE2

November 30, 2010
Jim Surowiecki has a spirited defense of QE2, and specifically calls me out as one of its "hysterical" opponents:

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Jim Surowiecki has a spirited defense of QE2, and specifically calls me out as one of its “hysterical” opponents:

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 weird thing is that Surowiecki and I actually agree on most of the issues here. He’s quite right that QE2 might be ineffective—indeed, I’d consider the probability of that to be pretty high. It might also be mildly inflationary: that’s what the Fed wants, and there’s a genuine possibility that QE2 will go entirely according to plan.

The “high-grade monetary heroin” quote comes from some guy trying to be noticed on TV, as does my “bubble-blower” quote, for that matter. The “eviscerates” quote I think comes from Paul Ryan, a politician who, as Surowiecki himself puts it, has as his top priority that Obama be a one-term president; as such, he can be counted on to harshly oppose all government economic policy, even when it comes from a semi-independent Fed.

And while I’m genuinely happy that Ultimi Barbarorum’s anonymous Baruch has made it into the pages of The New Yorker, I fear that he’s being deliberately misquoted for effect.

What Baruch and I are worried about is fat tails and unintended consequences. I don’t think that we’re hysterically attacking QE2, so much as pointing out that it’s never been done before, that we don’t know whether it will work, and that, if it doesn’t work, we don’t know how it’s going to fail, either. Speaking for myself, I am not hysterically opposed to QE2. In fact, in the very video which Surowiecki quotes, I say this:

Frankly this is all that Bernanke can do. If he raised interest rates, things would be even worse. The problem is that interest rates are so low already that if you bring them down, it doesn’t induce more borrowing… It’s really hard to see how the unemployment rate is going to come down. Ben Bernanke’s going to have to do everything he can, and that means blowing these bubbles, doing his quantitative easing, and all manner of other inventive and weird stuff that he does. Will it work? Probably not. He has to try… this is the only chance we realistically have to turn this economy around, and really start making it grow in a sustainable way, and bring the employment level up, and bring the unemployment level down.

Contrast Surowiecki’s paraphrase:

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.

Well, I can’t speak for people like Paul Ryan, but I can certainly speak for myself: the follow-up video, recorded in exactly the same take, explicitly says that the government should do something—much more than it’s doing right now—to bring down the unemployment rate. I’m just saying that the best way of the government doing that is not via monetary policy—which doesn’t seem to be having much effect on unemployment, and which can have nasty unintended side-effects—but rather by fiscal policy. Would Surowiecki not agree with me on that?

I’m all in favor of the Fed, in Surowiecki’s words, “nudging people to take a little more risk”—especially when it can do so the old-fashioned way, by cutting interest rates. But it seems to me that insofar as people are taking on more risk these days, they’re doing so in the speculative financial markets, which have fatter tails than ever before and which are just as capable of creating a crisis as they are of helping the economy to grow by allocating capital efficiently.

Here’s a chart of the S&P 500 over the past year: Surowiecki can characterize its current levels as “virtually unchanged since this spring” if he likes, but I have to say it looks pretty high to me, especially as Europe struggles with a major crisis of possibly existential proportions.


Can I say for sure that the strength of the S&P 500 in the face of global uncertainty is a function of QE2? Of course not. But remember that “higher stock prices” are an explicit goal of Bernanke and the Fed. If QE2 is working, this is one way that it will do so, by encouraging companies to raise permanent capital because stock prices are high. I just worry that the Fed is out of ammunition, and that with interest rates at zero, it can no longer help the real economy by manipulating the financial economy. And that QE2, far from making the real economy better, will just make the financial economy more volatile and fragile.


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