Q2 is built around the same thinking that helped create this economic mess.
As I said FED ran out of ideas QE "it is now the only tool left standing is a sad indictment of current economic policy."
Ben Bernanke's QE2 is misguided
guardian.co.uk
Quantitative easing 2 is aimed at job creation, yet it is built around the same thinking that helped create this economic mess
Chris Payne guardian.co.uk, Saturday 6 November 2010 17.00 GMT Ben Bernanke reaffirmed the Fed intends to buy $600bn of US treasury bonds in the open market as part of quantitative easing 2. Photograph: Jason Reed/Reuters
It is a somewhat ironic coincidence that on the same day as the American electorate rejected out of hand any more talk of fiscal stimulus, Federal Reserve chairman Ben Bernanke, writing in the Washington Post, reaffirmed his commitment to a different kind of stimulus – the monetary variety. Starting this month, and continuing up until mid-2011, the Fed intends to buy $600bn of US treasury bonds in the open market. This programme will be known as "quantitative easing 2" or QE2; its express intention being to tackle unemployment. Unencumbered by an electorate resolutely opposed to a fiscal stimulus, some of the country's finest monetary economists remain committed to stimulating the economy in an entirely different way.
But while the motivation for QE2 remains sound, that it is now the only tool left standing is a sad indictment of current economic policy. We should remember this policy encapsulates the same thinking that helped create this economic mess in the first place.
So how is QE2 meant to work? As America's central bank, the Federal Reserve has the power to create "high-powered" money, ie notes and coins, as well as "digital" money, which it can credit to the private banks when it purchases assets from them. The Fed is hoping that when the banks receive this freshly created money, they will start lending it out. This is a good hope to have. However, so far private banks, fearful of the continued decline in house prices, rising foreclosures and a weak economy have chosen to protect their balance sheets by holding onto their cash. Moreover, the demand side is little better, for what is often forgotten is that there can be no lending unless there are willing borrowers. Most households are looking to repay debt; it is unlikely that QE2 will change their minds on this.
But trying to get banks to lend is only one part of what QE2 is designed to achieve, for it is not just banks that will sell their bonds to the Fed: many other investors will end up selling their bonds, too. And these investors will use their cash to buy other tradable assets, such as corporate bonds and shares in the stock market. Indeed, the 80% plus rise in American share prices since the low reflects, in part, that money from QE1 found its way into the stock market, and that everyone knows that QE2 is coming soon. And, just in case you wondered, this is entirely part of the plan. For as Bernanke himself said: "Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion."
Of course, there is something deeply unsettling about an economic policy based on boosting the wealth of the rich asset-heavy in the hope they will feel more inclined to spend so that jobs might be created for the unemployed. Indeed, John Maynard Keynes would be wondering why on earth policymakers are going through the middleman at all. In his 1936 classic, The General Theory of Employment, Interest and Money, he argued that the British Treasury could, if it saw fit, print money to pay for railways, roads and houses. He even suggested that if we were too stubborn to do that, new money could be buried in the ground and private companies could compete for the rights to employ workers to dig it up again. I suspect he would have found the idea that central banks were increasing the wealth of the rich in the hope that they might spend some of it slightly odd – a rather roundabout and complex route to get to the nub of the matter, unemployment.
But this is how far economic policy has come. The American public would rather make the rich richer (in the hope that they might spend some of it) than raise taxes from high earners so as to spend money on better roads, education, healthcare for all and a train service less befitting the sub-Sahara. Most pour scorn on the idea of government intervention in the real economy, while ignoring the fact that the Fed continues to create billions of dollars so that the balance sheets of the wealthy remain healthy.
Most worrying of all, the Fed hopes consumers will soon resume their spending without seeming to notice that it was precisely a consumption boom financed by rising asset prices that led to this mess. For it is not ultimately the prices of shares, bonds or houses that determine a country's wealth but both the productivity of all who work in that nation and the investment in capital that will enable more to be produced in the future. Given that households in the US (and UK) desperately need to increase their saving it is unlikely that a rising stock market will affect anywhere near enough of them to start boosting consumption in an economically significant fashion. It is unlikely that QE2 will be successful.
History tells us that printing money to make jobs is a dangerous inflationary game. History also tells us that there are unique periods of time when these kinds of policies work. I doubt that we are at that point yet. And clearly 10% unemployment is nowhere near as high as it was during the Great Depression when the national average in the US was 25%. Even so, this is the 21st century and not the 1930s; there is, understandably, an expectation in the west that our productivity and development should be able to provide decently paid employment for the vast majority of people. At some point western governments might well find themselves utilising Keynes's more radical ideas. For the time being though, it seems as if governments are determined to tighten their belts and let central banks attempt to reignite the consumer boom |
