Concerning the letter from economists protesting the Fed’s QE2, perhaps the details of monetary policy have been the subject of this level of public debate before, but I don’t recall it personally. At the same time, I’ve never heard of a Fed governor who was so open about his plan to inflate the money supply. It was almost as if he wanted to generate inflation expectations and play off market psychology to drive down the dollar.
What’s best about the letter is the implicit recognition that there is more going on here than mere price effects; there are also market distortions to consider: “another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets.”
I’m presuming that the signers don’t mind another printing of it.
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.
Cliff Asness
AQR CapitalMichael J. Boskin
Stanford University
Former Chairman, President’s Council of Economic Advisors (George H.W. Bush Administration)Richard X. Bove
Rochdale SecuritiesCharles W. Calomiris
Columbia University Graduate School of BusinessJim Chanos
Kynikos AssociatesJohn F. Cogan
Stanford University
Former Associate Director, U.S. Office of Management and Budget (Reagan Administration)Niall Ferguson
Harvard University
Author, The Ascent of Money: A Financial History of the WorldNicole Gelinas
Manhattan Institute & e21
Author, After the Fall: Saving Capitalism from Wall Street—and WashingtonJames Grant
Grant’s Interest Rate ObserverKevin A. Hassett
American Enterprise Institute
Former Senior Economist, Board of Governors of the Federal ReserveRoger Hertog
The Hertog FoundationGregory Hess
Claremont McKenna CollegeDouglas Holtz-Eakin
Former Director, Congressional Budget OfficeSeth Klarman
Baupost GroupWilliam Kristol
Editor, The Weekly StandardDavid Malpass
GroPac
Former Deputy Assistant Treasury Secretary (Reagan Administration)Ronald I. McKinnon
Stanford UniversityDan Senor
Council on Foreign Relations
Co-Author, Start-Up Nation: The Story of Israel’s Economic MiracleAmity Shlaes
Council on Foreign Relations
Author, The Forgotten Man: A New History of the Great DepressionPaul E. Singer
Elliott AssociatesJohn B. Taylor
Stanford University
Former Undersecretary of Treasury for International Affairs (George W. Bush Administration)Peter J. Wallison
American Enterprise Institute
Former Treasury and White House Counsel (Reagan Administration)Geoffrey Wood
Cass Business School at City University London
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There is an interesting, but predictable, response from a FRB spokeswoman on the WSJ link. Basically, the Fed blames the government.
As for the people who signed this letter, one of my first reactions was that it would have little credibility with the left because some who signed were part of the Reagan and Bush administrations. I thought it would be seen as just “right wing lies”. The comment thread at The WSJ has taken that form.
I agree with your concern about market distortions. I add two others:
1) As Alan Meltzer recently noted, the Fed recently switched from the PCE deflator to the more heavily housing-weighted CPI for measuring inflation. Looking at the PCE, inflation is in the Fed’s target, which makes QE2 unnecessary. It has me wondering if the change was because the Fed is still worried about toxic assets and the possibility of TARP2.
2) I recently heard letter-signer John Taylor express concern about the dangers of unwinding the Fed’s balance sheet. If inflation fears lead to higher federal debt service costs, the Fed will have a hard time purging large quantities of Treasuries on their books without sending debt service costs even higher and risking a sovereign default crisis.
notice the CFR members. Interesting…
There’s been criticism of the authors, mainly that they don’t know what they are talking about (due to their bad calls in the past). Even Krugman has been getting in on the howling.
http://www.ritholtz.com/blog/2010/11/dubious-open-letter-to-bernanke/
Trouble with this reasoning is that those who did see it coming (the Austrians and some others), have the same conclusion as the writers of this letter; that QE is a highly dangerous operation which should be discontinued.
Nassim Taleb has recently broken silence to criticize QE II as being too big a risk:
http://www.youtube.com/watch?v=X_RTZE6Zls4
Even highly respected operators (not windbags like Krugman) of the Keynesian school, like Jeremy Grantham are highly critical of the Fed’s overreaching (trying to implement fiscal policy, when all they can effectively control is monetary policy):
http://www.cnbc.com/id/40131748
“Over a year into the recovery”? Who are they kidding?
The “recovery” is based on GDP, itself a deeply flawed benchmark that includes government spending, all of which is destructive.
While the message is better than rolling over and accepting whatever the Fed decides, a more definitive response is certainly called for. Why don’t these luminaries call “quantitative easing” what is really is: government sanctioned counterfeiting. Printing money to pay one’s debt is immoral, and in a sane society, would be illegal.
Bernanke should be in jail right now. If this were a just world, the CEOs of Goldman, BoA, and CitiCorp would be his cellmates. They are all crooks. Madoff looks like a piker in comparison.
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