Criticism of Fed On Quantitative Easing Are Wrong: We Need More
Criticism that the Federal Reserve should not be putting fresh cash into the economy are wrong. If it does more good than harm on the employment front, it's worth it.
Now that the dust has settled after the Fed's decision to start re-investing the proceeds from its balance sheet, the worrywarts are bound to come out of the woodwork to talk about why this won't work, and why it's dangerous. A former Fed governor and now professor at Columbia University, Frederic Mishkin, told Bloomberg that buying more financial assets might not be such a good idea:
It's much more questionable whether you can have these policies be as effective when financial markets are more stabilized ... It may look like the Federal Reserve is aiding and abetting irresponsible fiscal behavior on the part of our politicians. That's clearly not their intent but it's subject to that kind of interpretation.(Bear in mind that if this were true, longer-term Treasury rates would be rising, not falling. And 30-year mortgage rates would not be touching record lows.)
From across the Atlantic, Marco Annunziata, the chief economist of UniCredit, the big European bank, similarly frets about the policy of quantitative easing (as central bank asset purchases are known): "The financial system is working fairly well, and there is no convincing evidence that more QE can lead to more investment and jobs."
These critiques boil down to two objections: it might not work, and it sends signals that we will overlook bad decisions made by politicians. Neither is entirely wrong but both are off base.
Recall the two years after the onset of financial system convulstions in August 2007. Ben Bernanke & Co. were full of "blue sky" ideas, as the Fed chairman called them. Slash Rates. Create new borrowing facilities. Take bad debt from Bear Stearns onto the public balance sheet. Rescue AIG. And when the time came, it went to Congress to urge public recapitalization of the banking system. In other words, the Fed swung into action without knowing whether what they did would work, and they went to Congress without knowing whether legislators act. It would be nice if Congress and the administration were more amenable to stimulus, a less blunt instrument than QE. But failing that, the Fed should apply the same standard to the floundering economy that they did to the floundering financial system: try, try and try again.
As for the second objection: Might you, by raising inflation through QE, devalue the dollar? Yes. Should Congress stimulate more? Also yes. But will Fed action ease pressure for fiscal consolidation? Pretty hard to imagine. And, again, we dispensed with the hand-wringing when it came to bailing out banks. We should not worry about moral hazard when fighting unemployment.
Bernanke has vowed not to go down in history as the guy who let the banking system collapse and usher in a Great Depression. But if he fails to rally the Fed behind firm action on the economy, he will go down as the midwife of the Great Stagnation.
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