James Pethokoukis

Politics and policy from inside Washington

Bernanke probably agrees with the anti-QE2 letter

November 15, 2010

A bunch of right-of-center investors, economists and journalists (under the banner of the great e21 group) have signed an open letter to Ben Bernanke:

We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.

We subscribe to your statement in The Washington Post on November 4 that “the Federal Reserve cannot solve all the economy’s problems on its own.” In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.

A few thoughts here:

1. I have no doubt that Bernanke would prefer not to be doing QE2, either. I think his preference, like those who signed the letter, would be for more fiscal action accompanied by a long-range deficit reduction plan. But, seeing that is not likely to happen, he is using what tools he has.

2. In most countries where the central banks are politicized, the pressure is to running the printing presses. In America, it’s just the opposite — at least from conservatives.

3. Is there any chance that Bernanke gets a third-term? Almost certainly not if a Republican wins the presidency in 2012.

Comments

The American gov’t and the Obama administration above all need to provide CERTAINTY for American businesspeople. Even if its bad certainty, there must be certainty so businesspeople can start planning and investing again. No one knows how the healthcare bill will ultimately impact business or even if it will ever get implemented. No one knows if or when the gov’t will stop its regulatory binge. When will they finally make a decision on taxes? Other things are beyond the President’s control, like a bottoming of the housing market, but he can still send some signals. Obama seems too fixated on his long-term social(ist) agenda to realize that the country needs some fundamental leadership on a day-to-day basis. Pres. Bush would have by now established a few (decidedly simple) guiding principles, giving the American people something to hold onto, i.e. CERTAINTY. The economic equivalent of “you’re with us or your against us.”

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