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Two Cheers for Ben Bernanke and QE2 -- but None for Congress

QE2 didn't jolt the U.S. economy out of its slumber, spawn millions of jobs and cause official Washington to break out in a group hug. So what else is new?

Don't get me wrong -- there's reason to question whether the Federal Reserve got it right last summer in settling on a policy of boosting growth by purchasing $600 billion in Treasury bonds. That's a fairly low-voltage shock given that consumers and small businesses remain focused on shedding debt, not on spending. Mainlining money into the economy also appears to have agitated, if not fully aroused, inflation and reduced Americans' buying power by depressing the dollar.

As William Greider has argued, a gutsier Fed might've tried something really bold by skipping a second bond-buying binge and directing money instead where it's needed most -- to small businesses and consumers down here in the bowels of the "real" economy. QE2 has energized the stock market and lowered borrowing costs for some companies. But it hasn't done much for the broader economy. Reports the NYT:

A study published in February found that interest rates decreased, but only for companies with top credit ratings. "Rates that are highly relevant for households and many corporations -- mortgage rates and rates on lower-grade corporate bonds -- were largely unaffected by the policy," wrote Arvind Krishnamurthy and Annette Vissing-Jorgensen, both finance professors at Northwestern University.
How QE2 lowers the deficit
But let's recall what QE2 did accomplish. First, it threw a safety harness around the economy at a time it was threatening to deflate. Would wages and prices have plunged if Fed Chairman Ben Bernanke hadn't administered another dose of medicine? Hard to say, but it would've been nuts to find out. The policy provided an important psychological lift, underscoring the central bank's willingness to take action to halt the slide.

Second, economist Dean Baker notes, QE2 helped cut the federal deficit. Why? Expanding the Fed's balance sheet means the central bank pays itself more interest, which then drops back into federal coffers. The Fed last year refunded nearly $80 billion to the U.S. Treasury. That's roughly twice as much as both Democrats and Republicans agreed to cut in going through their budget deficit agonistes earlier this month. Holding around $3 trillion in assets would allow the Fed to reduce the deficit by nearly $1.5 trillion over the next decade, he says.

Third, QE2 bought time for Congress to come up with a solution. Now as then, the major obstacles to economic recovery are political. Same goes for the solutions. Monetary policy was never expected to electrify growth. Given the nature of the financial crisis, only fiscal policy can do that. And for now Washington is still unpicking that Gordian knot.

Stuck in the middle with you
The result? Half measures. A billion-dollar band-aid on a trillion-dollar sucking wound. Among Republicans, a politics equal parts nihilistic (on spending) and delusional (on taxes). On the other side of the aisle, an eagerness to declare victory even in retreat. Writes the WaPo's Ezra Klein, aptly comparing QE2's limitations to the problems with the inadequate federal stimulus ordered up by President Obama in 2009:

The story behind QE2 echoes the story behind the stimulus -- and much else that we've tried since the financial collapse. In 2007 and 2008, a truly extraordinary event reshaped our economy. But our political system remained much the same. So though various government entities attempted to mount an extraordinary response, our policies, particularly as we got further and further from the collapse of Lehman [Brothers] and more and more used to high unemployment, became quite underpowered when compared to the events they were meant to address. And then, having not done enough to make a major dent in the problem, they become discredited because they've failed to make a major dent in the problem, which in turn made it even harder to amp them up to a point where they'd be effective.
Bernanke is set to speak on Wednesday in the first of his quarterly press briefings to update us on the Fed's latest thinking. This should be his message to Congress and to the White House: We've done what we can -- now it's your turn.