http://www.nytimes.com/2010/11/19/opinion/19krugman.html?_r=2&ref=opinion
Counter Point:
http://www.washingtontimes.com/news/2010/nov/18/fed-takes-wrong-course/
Krugman's serving his mission well.
Axis of Depression
By PAUL KRUGMAN
It’s not as if the Fed is doing anything radical. It’s true that the Fed normally conducts monetary policy by buying short-term U.S. government debt, whereas now, under the unhelpful name of “quantitative easing,” it’s buying longer-term debt. (Buying more short-term debt is pointless because the interest rate on that debt is near zero.) But Ben Bernanke, the Fed chairman, had it right when he protested that this is “just monetary policy.” The Fed is trying to reduce interest rates, as it always does when unemployment is high and inflation is low.
And inflation is indeed low. Core inflation — a measure that excludes volatile food and energy prices, and is widely considered a better gauge of underlying trends than the headline number — is running at just 0.6 percent, the lowest level ever recorded. Meanwhile, unemployment is almost 10 percent, and long-term unemployment is worse than it has been since the Great Depression.
So the case for Fed action is overwhelming. In fact, the main concern reasonable people have about the Fed’s plans — a concern that I share — is that they are likely to prove too weak, too ineffective.
But there are reasonable people — and then there’s the China-Germany-G.O.P. axis of depression.
It’s no mystery why China and Germany are on the warpath against the Fed. Both nations are accustomed to running huge trade surpluses. But for some countries to run trade surpluses, others must run trade deficits — and, for years, that has meant us. The Fed’s expansionary policies, however, have the side effect of somewhat weakening the dollar, making U.S. goods more competitive, and paving the way for a smaller U.S. deficit. And the Chinese and Germans don’t want to see that happen.
For the Chinese government, by the way, attacking the Fed has the additional benefit of shifting attention away from its own currency manipulation, which keeps China’s currency artificially weak — precisely the sin China falsely accuses America of committing.
But why are Republicans joining in this attack?
Mr. Bernanke and his colleagues seem stunned to find themselves in the cross hairs. They thought they were acting in the spirit of none other than Milton Friedman, who blamed the Fed for not acting more forcefully during the Great Depression — and who, in 1998, called on the Bank of Japan to “buy government bonds on the open market,” exactly what the Fed is now doing.
Republicans, however, will have none of it, raising objections that range from the odd to the incoherent.
The odd: on Monday, a somewhat strange group of Republican figures — who knew that William Kristol was an expert on monetary policy? — released an open letter to the Fed warning that its policies “risk currency debasement and inflation.” These concerns were echoed in a letter the top four Republicans in Congress sent Mr. Bernanke on Wednesday. Neither letter explained why we should fear inflation when the reality is that inflation keeps hitting record lows.
And about dollar debasement: leaving aside the fact that a weaker dollar actually helps U.S. manufacturing, where were these people during the previous administration? The dollar slid steadily through most of the Bush years, a decline that dwarfs the recent downtick. Why weren’t there similar letters demanding that Alan Greenspan, the Fed chairman at the time, tighten policy?
Meanwhile, the incoherent: Two Republicans, Mike Pence in the House and Bob Corker in the Senate, have called on the Fed to abandon all efforts to achieve full employment and focus solely on price stability. Why? Because unemployment remains so high. No, I don’t understand the logic either.
So what’s really motivating the G.O.P. attack on the Fed? Mr. Bernanke and his colleagues were clearly caught by surprise, but the budget expert Stan Collender predicted it all. Back in August, he warned Mr. Bernanke that “with Republican policy makers seeing economic hardship as the path to election glory,” they would be “opposed to any actions taken by the Federal Reserve that would make the economy better.” In short, their real fear is not that Fed actions will be harmful, it is that they might succeed.
Hence the axis of depression. No doubt some of Mr. Bernanke’s critics are motivated by sincere intellectual conviction, but the core reason for the attack on the Fed is self-interest, pure and simple. China and Germany want America to stay uncompetitive; Republicans want the economy to stay weak as long as there’s a Democrat in the White House.
And if Mr. Bernanke gives in to their bullying, they may all get their wish.
SHUGHART: Fed takes wrong course
Quantitative easing leads away from the path to economic recovery
Illustration: QE2 by Greg Groesch for The Washington Times
Question of the Day
Do you consider the tighter airport security overly intrusive?
Announced recently by its chairman, Ben S. Bernanke, the Fed plans to buy $600 billion in Treasury securities from the banks and other financial institutions that currently hold them. By exchanging bonds for dollars, the purchases will expand the amount of credit available for lending, drive down long-term interest rates and provide incentives for private businesses to invest in new plant and equipment, recall laid-off workers, hire new ones and theoretically, restore economic prosperity.
Or so Mr. Bernanke hopes.
Fed Vice Chairman Janet Yellen told the Wall Street Journal that "I'm having a hard time seeing where [else] really robust growth can come from." Even so, Ms. Yellen doesn't see the economy returning to normal until 2013.
America's central bank is playing a dangerous game. The key assumption behind "QE2" is that credit markets are frozen - and lenders are reluctant to lend - because the financial system lacks sufficient liquidity.
But banks are awash in loanable funds. When the Fed started its first round of quantitative easing in 2009, to help achieve its target of a near-zero federal funds rate (the interest rate banks charge one another on overnight loans), lenders simply sat on the extra reserves. They did so not because they didn't want to use those funds profitably, but because the bursting of the housing bubble and the ensuing "Great Recession" sensitized them anew to credit risk.
Then, as now, the economy's arteries were clogged with toxic assets, including mortgage-backed securities whose values are yet unknown because the real estate market hasn't yet hit bottom.
In order to minimize credit risks, banks invested in safer Treasuries instead. The Fed now proposes to soak up an additional $600 billion of those assets.
Buying bonds will expand bank reserves once again, but it does nothing either to change underlying economic fundamentals or to resolve the uncertainty about future tax rates, the costs of Obamacare, regulatory "reform" of financial markets and other government policies that undermine the spending plans of private business owners and consumers alike.
It doesn't take a rocket scientist to predict that banks still will hesitate to lend despite having an additional $600 billion in reserves, or to realize that if credit markets "unfreeze" at some future date, as they inevitably will, the disgorging of trillions of dollars in now-idle loanable funds is apt to produce much higher rates of inflation, unless the Fed reverses course quickly and reverts to a tight money policy.
Even if the Fed succeeds in reducing long-term interest rates, the economy will not necessarily be out of the woods. Artificially low interest rates induce businesses to undertake projects that otherwise would be unprofitable. Not to worry too much, though. Investors have been selling Treasury securities in anticipation of the Fed's buyback plan, raising yields to levels not seen for three months.
Some commentators suggest that Washington's fiscal and monetary responses to current economic events have been too timid. How much would be enough: $2 trillion, $3 trillion, more?
It's fashionable on the left to argue that America should emulate Europe, especially with respect to social-welfare policies.
But Europeans - and many U.S. economists - are wising up. Coincident with the Fed's latest initiative, the European Central Bank signaled that it will refrain from further monetary stimulus, at least for the time being. That policy of restraint, along with the fiscal austerity programs recently adopted by France, Germany and the United Kingdom, point down the path our own government should take.
William F. Shughart II is a senior fellow with the Independent Institute and professor of economics at the University of Mississippi.
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